Should UK investors have easier access to crypto?

Cryptocurrency investors and firms in the UK are expressing frustration at being left behind their US counterparts, after US regulators approved several mainstream products that have made it easier than ever for the investing public to buy bitcoin. 

Earlier this year the US Securities and Exchange Commission approved a series of bitcoin spot exchange traded funds, investment vehicles that offer exposure to bitcoin, the world’s best-known cryptocurrency. The 11 newly approved funds, which are barred to UK investors, are issued by some of Wall Street’s biggest names, including Fidelity and BlackRock, the world’s largest asset manager. 

The January launch of these products propelled bitcoin last month to a record high price of $73,800, and has given it a sense of recognised legitimacy it has never previously achieved in its near 15-year history. 

Americans eager to invest in bitcoin can now do so via highly regulated products, rather than having to buy bitcoin directly on offshore crypto exchanges that have controversial compliance histories. 

Wall Street’s new funds — which have pulled in well over $10bn in fresh capital in less than three months of trading — have prompted investors in the UK to question whether Westminster’s own efforts to establish a digital assets hub in London have fallen behind. 

Whether the UK follows the US’s path will determine if British investors can eventually include bitcoin in their portfolios, with the greater confidence afforded by UK-regulated options. But the risks associated with this highly volatile asset mean an expansion into cryptocurrency remains far from inevitable. 

Breathtaking returns

Spot bitcoin ETFs are not available in the UK, and in 2021 the Financial Conduct Authority placed a ban on crypto-related derivatives to retail customers, saying the underlying crypto assets have “no reliable basis for valuation”. 

“Bitcoin is by far the most well-known crypto asset, and for it to be very difficult for the UK public to be able to buy it, how can we claim to be a crypto hub if we only offer risky ways of buying this asset?” said Tim Lowe, strategic adviser at London-based institutional staking firm Attestant. 

Some say the regulator has deprived UK investors of one of the best-performing investments available. Daniel Masters, executive chair at crypto investment group CoinShares, says: “The FCA’s job is to ensure a level playing field, not to decide what assets people should or shouldn’t invest in.” 

Since the newly approved league of ETFs started trading on January 11, bitcoin’s price has risen sharply. It began the year valued at about $42,200, still far off its previous all-time high of $69,000. 

But within the space of six weeks it broke through $50,000 and registered its current all-time high price of $73,800 on March 14, representing a 70 per cent gain since the bitcoin ETFs started trading. 

The barrier to UK investors 

The token’s returns have compounded frustrations in London, where industry members say regulators have failed to provide consumers with a safe and accessible route to bitcoin. 

Masters argues hundreds of millions of dollars were lost by UK investors doing business on FTX, the cryptocurrency exchange owned by Sam Bankman-Fried that collapsed in 2022. But that was because they were able to access it, not because it was registered or regulated. 

“You’re creating this weird outcome where retail investors are still going to get access to these products but they will go to offshore, less regulated exchanges that are sketchy for a whole host of reasons,” said Alex Campbell of London-based investing app Freetrade. 

You could say the UK is behind on opening up to the world of digital assets. On the other hand you might [say] they’re ahead when it comes to protecting consumers from an untested and volatile asset

In the aftermath of bitcoin’s latest record-setting run, the UK’s financial regulator has ceded some ground to the sector, choosing to allow the creation of some crypto-linked exchange traded funds — debt securities that track an underlying asset — to list on the stock market. But, crucially, these are only available to professional investors, not to retail investors. 

As of next month, issuers will be able to list notes that are linked not only to bitcoin but to ether — the second most popular cryptocurrency on the market — on the London Stock Exchange.

“With increased insight and data due to a longer period of trading history, the FCA believes exchanges and professional investors should now be able to better establish whether crypto-ETNs meet their risk appetite,” the FCA said at the time. 

Britain in the slow lane

The FCA’s latest move has caused some in the industry to hope the barriers to crypto investing will be lowered in the UK; though the US and other jurisdictions are moving at a much faster pace. 

The EU approved bespoke legislation for the crypto sector, while Hong Kong launched its first two ETFs for crypto futures in December last year, allowing investors in the city to access products traded on the Chicago Mercantile Exchange. 

In May 2022 — when crypto stood on the precipice of a crisis — bitcoin and ether ETFs managed by Sydney-based ETF Securities started trading on the Cboe Australia exchange. Rival Sydneysiders Cosmos Asset Management’s bitcoin feeder ETF was launched at the same time, marking the culmination of a five-year battle to introduce the first spot bitcoin ETFs in the region.

In contrast, the UK has unveiled a series of proposals to regulate crypto in line with the rules already in place for traditional finance. In particular, the government has sought to bring stablecoins — a type of digital token designed to track the price of hard currencies — into the economy as a payment option for the public. 

The UK’s push to regulate the sector has allowed it to pull in a series of high-profile companies, including Silicon Valley venture capital firm Andreessen Horowitz, which in summer last year chose London for its first office outside the US. 

But its efforts have been stymied by struggles between Westminster politicians and London’s chief markets watchdog. 

Despite the FCA’s latest announcement, the regulator cooled the market’s enthusiasm when it re-emphasised that “crypto derivatives are ill-suited for retail customers”. 

The regulator has also clamped down on crypto companies and their ability to market products to the British public. Since October last year, only FCA-authorised companies can market in the UK, and failure to comply could result in an unlimited fine and potentially two years in prison. 

The standards are among the toughest in the world, and prompted crypto exchange Binance to pull all marketing from the UK. In the same month, then-City minister Andrew Griffith urged the FCA to take a softer approach to the nascent sector. 

The government’s crypto ambitions were also temporarily upended last year when the Treasury select committee — a powerful cross-party group of MPs — called for the crypto sector to be regulated as gambling, rather than as a traditional financial service. 

The group, led by MP Harriett Baldwin, said cryptocurrencies including bitcoin have “no intrinsic value” and instead offer “huge price volatility and no discernible social good”.

“It’s antithetical to the stated policy of the government, which is a lot more forward-thinking about crypto,” said Ilan Solot, senior global markets strategist at Marex. 

“There is consistency from the regulator and consistency from the politicians, but the two messages are in conflict with each other,” added Campbell. 

But, despite Westminster’s push to style London as a hub for crypto innovation, the FCA’s cold stance on the sector has been validated by a series of long-running compliance scandals across the sector. 

Bitcoin’s troubled rise

Despite rampant market enthusiasm for bitcoin, the sector remains beset with controversy. The underlying spot bitcoin market — which investors are exposed to through ETFs regardless of how tightly regulated the issuer — remains largely unregulated. 

“The fact there’s regulated entities providing investment options into bitcoin is something that gives investors confidence, but it doesn’t alter the fundamental nature of bitcoin itself,” said Laith Khalaf, head of investment analysis at investment platform AJ Bell in London. 

“There aren’t any fundamentals to bitcoin which give an anchor to the price, which makes it more vulnerable than other assets to major swings. There is nothing there that you can use as a base for a valuation.”  

The world’s most well-known crypto exchanges are also still mired in scandal, despite bitcoin’s latest recovery. Binance, which faced a backlash from the FCA in 2021 when the regulator said it would be incapable of supervising the sprawling group after it failed to respond to basic queries, paid $4.3bn to US authorities over criminal charges. 

The world’s largest exchange is also still fighting a lawsuit against the SEC, and has recently clashed with Nigerian authorities, which allege the company is compounding issues in the nation’s economy by setting unofficial prices for the rapidly devaluing naira. 

The SEC has also filed a lawsuit against Coinbase for allegedly operating as an unregistered national securities exchange. 

History also tells us the crypto markets go through major boom and bust cycles, each one bigger than before. In May 2022, just six months after bitcoin traded at $69,000, a now-infamous crypto platform named Terraform Labs collapsed, kick-starting an unprecedented market crisis. 

The crash — which culminated in the collapse of then crypto kingpin Bankman-Fried and his exchange — pulled bitcoin down to $16,000, a 75 per cent fall from its previous high. 

“On the one hand you could say the UK is behind on opening up to the world of digital assets. On the other hand you might well make the case that they’re ahead when it comes to protecting consumers from an untested and volatile asset,” said Khalaf. 

“Opening up the market might inspire more growth, but if there’s a failure that sets you back,” he added. “We don’t know where this sector will be in five or 10 years.”